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Restarting Growth in sub-Saharan Africa

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Africa
  • Restarting Growth in sub-Saharan Africa

Abebe Aemro Selassie, in this article, identified the challenges bedevilling sub-Saharan Africa, positing that strong domestic policy measures are urgently needed to restart the engine of growth

 Economic growth in sub-Saharan Africa has slowed markedly. After close to two decades of rapid expansion, 2016 saw the lowest level of growth in more than 20 years, with regional growth dipping to 1.4 percent. The loss in momentum was broad based, with activity slowing in almost two-thirds of the countries (accounting for more than four fifths of regional GDP). The main sources of encouragement are the sizable number of countries in Eastern and Western Africa where growth remains robust, albeit slower than in recent years.

And looking ahead, the outlook looks set to remain subdued. The modest recovery projected in 2017—to 2.6 percent—will barely put sub-Saharan Africa back on a path of rising per capita gains. Furthermore, the uptick will be largely driven by one-off factors in the three largest countries—a recovery in oil production in Nigeria, higher public spending in Angola, and a reduced drag from the drought in South Africa. The outlook is shrouded in substantial uncertainties: a faster than expected normalization of monetary policy in the U.S. could imply further appreciation of the U.S. dollar and a tightening of financing conditions; and a broad shift towards inward-looking policies at the global level would further hamper growth in the region. Domestic threats to a stronger economic recovery in some countries include civil conflict and the attendant dislocations like famine that they can trigger—as in South Sudan at the moment.

 Insufficient policy adjustment

The fall in commodity prices from their 2010-2013 peaks was a very substantial shock. But, three years after the slump many resource-intensive countries have yet to put in place a comprehensive set of policies to address the impact of the decline in prices. Countries which have been hardest hit by the decline, especially oil exporters such as Angola, Nigeria, and the countries of the Central African Economic and Monetary Union (CEMAC), are continuing to face budgetary revenue losses and balance of payments pressures. The delay in implementing much-needed adjustment policies is creating uncertainty, holding back investment, and risks generating even deeper difficulties in the future.

It is also concerning that vulnerabilities are emerging in many countries without significant commodity exports. While these countries have generally maintained high growth rates, their fiscal deficits have been high for a number of years, as their governments rightly sought to address social and infrastructure gaps. But now, public debt and borrowing costs are on the rise.

Against this background, the external environment is expected to provide only limited support. Improvements in commodity prices will provide some breathing space, but will not be enough to address existing imbalances among resource-intensive countries. In particular, oil prices are expected to stay far below their 2013 peaks. Likewise, external financing costs have declined from their peaks reached about a year ago, but they remain higher than for emerging and frontier market economies elsewhere in the world.

Strong policies are needed to restart the growth engine

In view of these challenges, what can be done to restart growth where it has faltered and preserve the existing momentum elsewhere? We see three priority areas:

First, a renewed focus on macroeconomic stability is a key prerequisite to realize the tremendous growth potential in the region. For the hardest-hit resource-intensive countries, strong fiscal consolidation is required, with an emphasis on revenue mobilization. This is needed to swiftly halt the decline in international reserves and offset permanent revenue losses, especially in the CEMAC. Where available, greater exchange rate flexibility and the elimination of exchange restrictions will be important to absorb part of the shock. For countries where growth is still strong, action is needed to address emerging vulnerabilities from a position of strength. Now is the time to shift the fiscal stance toward gradual fiscal consolidation to safeguard debt sustainability. Greater revenue mobilization offers the best route to maintain fiscal space for much needed development spending.

The second priority is to implement structural reforms to support macroeconomic rebalancing. On the structural fiscal front, the focus should be to improve domestic revenue mobilization and reduce the overreliance on commodity-related revenue and debt financing. Financial supervision needs to be strengthened, especially that of pan-African banks through enhanced cross-border collaboration. More broadly, greater emphasis is needed to support the economic diversification agenda starting with policies to address longstanding weaknesses in the business climate. This will help to attract investment towards new sectors and unleash the large and still untapped potential for private sector-led growth.

Finally, policies to strengthen social protection for the most vulnerable are essential. The current environment of low growth and widening macroeconomic imbalances risks reversing the decline in poverty. Existing social protection programs are often fragmented, not well-targeted, and typically cover only a small share of the population. There is a need to better target these programs and use savings from regressive expenditures such as fuel subsidies to ensure that the burden of adjustment does not fall on the most vulnerable.

While the growth momentum has undoubtedly slowed, medium-term growth prospects in sub-Saharan Africa remain bright. To fulfill the aspiration for higher living standards, strong and sound domestic policy measures are urgently needed to restart the growth engine.

  • Abebe Aemro Selassie, is Director, African Department, International Monetary Fund

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Brent Crude Oil Approaches $70 Per Barrel on Friday

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Crude oil

Nigerian Oil Approaches $70 Per Barrel Following OPEC+ Production Cuts Extension

Brent crude oil, against which Nigerian oil is priced, rose to $69 on Friday at 3:55 pm Nigerian time.

Oil price jumped after OPEC and allies, known as OPEC plus, agreed to role-over crude oil production cuts to further reduce global oil supplies and artificially sustain oil price in a move experts said could stoke inflationary pressure.

Brent crude oil rose from $63.86 per barrel on Wednesday to $69 per barrel on Friday as energy investors became more optimistic about the oil outlook.

While certain experts are worried that U.S crude oil production will eventually hurt OPEC strategy once the economy fully opens, few experts are saying production in the world’s largest economy won’t hit pre-pandemic highs.

According to Vicki Hollub, the CEO of Occidental, U.S oil production may not return to pre-pandemic levels given a shift in corporates’ value.

“I do believe that most companies have committed to value growth, rather than production growth,” she said during a CNBC Evolve conversation with Brian Sullivan. “And so I do believe that that’s going to be part of the reason that oil production in the United States does not get back to 13 million barrels a day.”

Hollub believes corporate organisations will focus on optimizing present operations and facilities, rather than seeking growth at all costs. She, however, noted that oil prices rebounded faster than expected, largely due to China, India and United States’ growing consumption.

The recovery looks more V-shaped than we had originally thought it would be,” she said. Occidental previous projection had oil production recovering to pre-pandemic levels by the middle of 2022. The CEO Now believes demand will return by the end of this year or the first few months of 2022.

I do believe we’re headed for a much healthier supply and demand environment” she said.

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Crude Oil

Oil Jumps to $67.70 as OPEC+ Extends Production Cuts

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Oil Jumps to $67.70 as OPEC+ Extends Production Cuts

Brent crude oil, against which Nigerian oil is priced, rose to $67.70 per barrel on Thursday following the decision of OPEC and allies, known as OPEC+, to extend production cuts.

OPEC and allies are presently debating whether to restore as much as 1.5 million barrels per day of crude oil in April, according to people with the knowledge of the meeting.

Experts have said OPEC+ continuous production cuts could increase global inflationary pressure with the rising price of could oil. However, Saudi Energy Minister Prince Abdulaziz bin Salman said “I don’t think it will overheat.”

Last year “we suffered alone, we as OPEC+” and now “it’s about being vigilant and being careful,” he said.

Saudi minister added that the additional 1 million barrel-a-day voluntary production cut the kingdom introduced in February was now open-ended. Meaning, OPEC+ will be withholding 7 million barrels a day or 7 percent of global demand from the market– even as fuel consumption recovers in many nations.

Experts have started predicting $75 a barrel by April.

“We expect oil prices to rise toward $70 to $75 a barrel during April,” said Ann-Louise Hittle, vice president of macro oils at consultant Wood Mackenzie Ltd. “The risk is these higher prices will dampen the tentative global recovery. But the Saudi energy minister is adamant OPEC+ must watch for concrete signs of a demand rise before he moves on production.”

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Gold

Gold Hits Eight-Month Low as Global Optimism Grows Amid Rising Demand for Bitcoin

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Gold Struggles Ahead of Economic Recovery as Bitcoin, New Gold, Surges

Global haven asset, gold, declined to the lowest in more than eight months on Tuesday as signs of global economic recovery became glaring with rising bond yields.

The price of the precious metal declined to $1,718 per ounce during London trading on Thursday, down from $2,072 it traded in August as more investors continue to cut down on their holdings of the metal.

The previous metal usually performs poorly with rising yields on other assets like bonds, especially given the fact that gold does not provide streams of interest payments. Investors have been jumping on US bonds ahead of President Joe Biden’s $1.9 trillion coronavirus stimulus package, expected to stoke stronger US price growth.

We see the rising bond yields as a sign of economic optimism, which has also prompted gold investors to sell some of their positions,” said Carsten Menke of Julius Baer.

Another analyst from Commerzbank, Carsten Fritsch, said that “gold’s reputation appears to have been tarnished considerably by the heavy losses of recent weeks, as evidenced by the ongoing outflows from gold ETFs”.

Experts at Investors King believed the growing demand for Bitcoin, now called the new gold, and other cryptocurrencies in recent months by institutional investors is hurting gold attractiveness.

In a recent report, analysts at Citigroup have started projecting mainstream acceptance for the unregulated dominant cryptocurrency, Bitcoin.

The price of Bitcoin has rallied by 60 percent to $52,000 this year alone. While Ethereum has risen by over 660 percent in 2021.

 

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